NORTHWEST BIOTHERAPEUTICS INC - Quarter Report: 2017 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2017

OR

For the transition period from ______to _______

Commission File Number: 001-35737

NORTHWEST BIOTHERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

4800 Montgomery Lane, Suite 800, Bethesda, MD 20814

(Address of principal executive offices) (Zip Code)

(240) 497-9024

(Registrant's telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x   No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨                

As of May 12, 2017, the total number of shares of common stock, par value $0.001 per share, outstanding was 191,796,437.

NORTHWEST BIOTHERAPEUTICS, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION 

NORTHWEST BIOTHERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share and per share amounts)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NORTHWEST BIOTHERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share amounts)

 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NORTHWEST BIOTHERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NORTHWEST BIOTHERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

(in thousands)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NORTHWEST BIOTHERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NORTHWEST BIOTHERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NORTHWEST BIOTHERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED STATEMENTS

1. Organization and Description of Business

Northwest Biotherapeutics, Inc. and its wholly owned subsidiaries NW Bio Gmbh, and Aracaris Capital, Ltd (collectively, the “Company”, “we”, “us” and “our”) were organized to discover and develop innovative immunotherapies for cancer.

The Company is developing an experimental dendritic cell vaccine using its platform technology known as DCVax. DCVax is currently being tested for use in the treatment of certain types of cancers.

Cognate BioServices, Inc. (“Cognate BioServices”), which is a company related by common ownership (Note 8), provides the Company with mission critical contract manufacturing services, research and development services, distribution and logistics, and related services, in compliance with the Company’s specifications and the applicable regulatory requirements for clinical grade cellular products. The Company and Cognate BioServices are currently parties to a series of contracts providing for these services as more fully described below. The Company is dependent on Cognate BioServices to provide the manufacturing services, and any interruption of such services could potentially have a material adverse effect on the Company’s ability to proceed with its clinical trials. Cognate BioServices’ manufacturing facility for clinical-grade cellular products is located in Memphis, Tennessee. In addition, a Cognate affiliate in Germany works with the Fraunhofer Institute to produce DCVax-L products there, and Cognate affiliates in the UK and Israel are preparing for production of DCVax-L products in those locations.

Although there are many contract manufacturers for small molecule drugs and for biologics, there are only a few contract manufacturers in the U.S., and even fewer in Europe, that specialize in producing living cell products and that have a track record of success with regulatory authorities. The manufacturing of living cell products is highly specialized and entirely different than production of biologics: the physical facilities and equipment are different, the types of personnel and skill sets are different, and the processes are different. The regulatory requirements relating to manufacturing and cellular products are especially challenging and are one of the most frequent reasons for the development of a company’s cellular products to be put on clinical hold (i.e., stopped by regulatory authorities).

In addition, the Company’s programs require a large amount of capacity in these specialized manufacturing facilities, and require that the large capacity be dedicated exclusively to the Company’s programs. Most medical products, including cellular products, are made in standardized batches: the same manufacturing suites are used for a number of companies’ products, at designated times scheduled in advance. In contrast, the Company’s products are fully personalized and not made in standardized batches: the Company’s products are made on demand, patient by patient, on an as needed basis.

2. Liquidity, Financial Condition and Management Plans

The Company used approximately $12.3 million of cash in its operating activities for the three months ended March 31, 2017, which included substantial payments for expenses previously incurred in connection with the Phase III clinical trial of DCVax-L. The Company incurred a $12.6 million net loss for the three months ended March 31, 2017, including $1.3 million of net aggregate charges for the interest associated with the accretion of convertible notes discount, fair value change in derivative financial instruments and loss from extinguishment of debt. Management believes that the Company has access to capital resources through the sale of equity and debt financing arrangements, however the Company has not secured any commitments for new financing for this specific purpose at this time.

The Company had current assets of $3.2 million as of March 31, 2017, and a working capital deficit of approximately $78.8 million at March 31, 2017. The Company owed an aggregate of $22.5 million of trade liabilities to related parties as of March 31, 2017. The Company has not yet generated any material revenue from the sale of its products and is subject to all of the risks and uncertainties that are typically faced by biotechnology companies that devote substantially all of their efforts to R&D and clinical trials and do not yet have commercial products. The Company expects to continue incurring losses for the foreseeable future. The Company’s existing liquidity is not sufficient to fund its operations, anticipated capital expenditures, working capital and other financing requirements until the Company reaches significant revenues.  Until that time, the Company will need to obtain additional equity and/or debt financing, especially if the Company experiences downturns in its business that are more severe or longer than anticipated, or if the Company experiences significant increases in expense levels resulting from being a publicly-traded company or from expansion of operations.  If the Company attempts to obtain additional equity or debt financing, the Company cannot assume that such financing will be available to the Company on favorable terms, or at all.

Because of recurring operating losses, net operating cash flow deficits, and an accumulated deficit, there is substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

3. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated interim financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated. Certain immaterial reclassifications have been made to prior period amounts to conform to the current period presentation.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same basis as the Company prepares its annual audited consolidated financial statements. The condensed consolidated balance sheet as of March 31, 2017, condensed consolidated statements of operations for the three months ended March 31, 2017 and 2016, condensed consolidated statements of comprehensive loss for the three months ended March 31, 2017 and 2016, condensed consolidated statement of stockholders’ equity (deficit) for the three months ended March 31, 2017, and the condensed consolidated statements of cash flows for the three months ended March 31, 2017 and 2016 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The results for the three months ended March 31, 2017 are not necessarily indicative of results to be expected for the year ending December 31, 2017 or for any future interim period. The condensed consolidated balance sheet at December 31, 2016 has been derived from audited financial statements; however, it does not include all of the information and notes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2016, and notes thereto included in the Company’s annual report on Form 10-K, which was filed with the SEC on April 17, 2017.

Use of Estimates

In preparing condensed consolidated financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of expenses during the reporting period. Due to inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in these estimates. On an ongoing basis, the Company evaluates its estimates and assumptions. These estimates and assumptions include valuing equity securities in share-based payment arrangements, valuing environmental liabilities, estimating the fair value of financial instruments recorded as derivative liabilities, and estimating the useful lives of depreciable assets and whether impairment charges may apply.

Warrant Liability

The Company accounts for certain common stock warrants outstanding as a liability at fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company's statements of operations. The fair value of the warrants issued by the Company has been estimated using Monte Carlo simulation and Black Scholes model.

Sequencing

As of October 13, 2016, the Company adopted a sequencing policy whereby all future instruments may be classified as a derivative liability with the exception of instruments related to share-based compensation issued to employees or directors.

Environmental Remediation Liabilities

The Company records environmental remediation liabilities for properties acquired. The environmental remediation liabilities are initially recorded at fair value. The liability is reduced for actual costs incurred in connection with the clean-up activities for each property. Upon completion of the clean-up, the environmental remediation liability is adjusted to equal the fair value of the remaining operation, maintenance and monitoring activities to be performed for the property. The amount of the additional liability resulting from the completion of the clean-up, if any, would be included in other income (expense). As of March 31, 2017, the Company estimated that the total environmental remediation costs associated with the purchase of the UK Facility will be approximately $6.2 million. This is a projected potential future cost. No such environmental costs have been incurred to date and none are currently pending. Contamination clean-up costs that improve the property from its original acquisition state will be capitalized as part of the property’s overall development costs. The Company engaged a third-party specialist to conduct certain surveys of the condition of the property which included, among other things, a preliminary analysis of potential environmental remediation exposures. The Company determined, based on information contained in the specialist’s report, that it would be required to estimate the fair value of an unconditional obligation to remediate specific ground contamination at an estimated fair value of approximately $6.2 million. The Company computed the fair value of this obligation using a probability weighted approach that measures the likelihood of the following two potential outcomes: (i) a higher probability requirement of erecting a protective barrier around the affected area at an estimated cost of approximately $4.5 million, and (ii) a lower probability requirement of having to excavate the affected area at an estimated cost of approximately $32.0 million. The Company’s estimate is preliminary and therefore subject to change as further studies are conducted, and as additional facts come to the Company’s attention. Environmental remediation efforts are complex, technical and subject to various uncertainties. Accordingly, it is at least reasonably possible that any changes in the Company’s estimate could materially differ from the management’s preliminary assessment discussed herein.      

Comprehensive Loss

The Company reports comprehensive loss and its components in its condensed consolidated financial statements. Comprehensive loss consists of net loss and foreign currency translation adjustments, affecting stockholders’ equity (deficit) that, under U.S, GAAP, are excluded from net loss.

Research and Development Costs

Research and development costs are charged to operations as incurred and consist primarily of clinical trial costs, related party manufacturing costs, consulting costs, contract research and development costs, clinical site costs and compensation costs. 

Significant Accounting Policies

There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2016 Annual Report.

Adoption of Recent Accounting Pronouncements 

Compensation-Stock Compensation

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. Under ASU No. 2016-09, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement and the APIC pools will be eliminated. In addition, ASU No. 2016-09 eliminates the requirement that excess tax benefits be realized before companies can recognize them. ASU No. 2016-09 also requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Furthermore, ASU No. 2016-09 will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. An employer with a statutory income tax withholding obligation will now be allowed to withhold shares with a fair value up to the amount of taxes owed using the maximum statutory tax rate in the employee’s applicable jurisdiction(s). ASU No. 2016-09 requires a company to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. Under current U.S. GAAP, it was not specified how these cash flows should be classified. In addition, companies will now have to elect whether to account for forfeitures on share-based payments by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. These aspects of ASU 2016-09 are effective for reporting periods beginning after December 15, 2016, with early adoption permitted provided that all of the guidance is adopted in the same period. The Company’s adoption of ASU No. 2016-09 on January 1, 2017 did not have a material impact on its condensed consolidated financial statements and related disclosures.

Recent Issued Accounting Pronouncements

Statement of Cash Flows

In August 2016, the FASB issued ASU No. 2016-15 Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which addresses specific cash flow classification issues where there is currently diversity in practice including debt prepayment and proceeds from the settlement of insurance claims. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, with early adoption permitted. The Company is currently assessing the impact that ASU No. 2016-15 will have on its condensed consolidated financial statements.

Revenue from Contracts with Customer

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, an updated standard on revenue recognition.  ASU No. 2014-09 provides enhancements to the quality and consistency of how revenue is reported by companies while also improving comparability in the financial statements of companies reporting using International Financial Reporting Standards or U.S. GAAP.  The main purpose of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively and improve guidance for multiple-element arrangements.  In July 2015, the FASB voted to approve a one-year deferral of the effective date of ASU No. 2014-09, which will be effective for the Company in the first quarter of fiscal year 2018 and may be applied on a full retrospective or modified retrospective approach. The Company is currently evaluating the pending adoption of ASU 2014-09 and its impact on the Company's consolidated financial statements and has not yet identified which transition method will be applied upon adoption.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customer. The new guidance is an update to ASC 606 and provides clarity on: identifying performance obligations and licensing implementation. For public companies, ASU No. 2016-10 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the impact of this guidance on its consolidated financial position, results of operations and cash flows.

Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements; and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 will be effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact that ASU 2016-01 will have on its consolidated financial statements and related disclosures.

Leases

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) which supersedes FASB ASC Topic 840, Leases (Topic 840) and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard will be effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements and related disclosures.

4. Fair Value Measurements

Derivative Warrants Granted in 2017

Public Offering

During the quarter ended March 31, 2017, the Company issued 53,265,538 warrants (the “Warrants”) to multiple investors (the “Holders”). Since the Company’s adopted sequencing policy (see Note 3), the warrants were classified as liabilities and measured at fair value on the grant date, with changes in fair value recognized as other income on the statement of operation and disclosed in the financial statements as long as the contracts remain classified as liabilities.

A summary of weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring warrant granted during the quarter ended March 31, 2017 is as follows:

Extinguishment of Warrant Liabilities Related to Cash Exercise

During the quarter ended March 31, 2017 approximately 3,100,000 warrants classified as derivative liabilities were exercised for cash. A summary of weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring warrant exercises (originally recorded as liabilities) during the quarter ended March 31, 2017 is as follows:

The following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy as of March 31, 2017 and December 31, 2016 (in thousands):

There were no transfers between Level 1, 2 or 3 during the three-month period ended March 31, 2017.

The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s management.

The following table presents changes in Level 3 liabilities measured at fair value for the three-month period ended March 31, 2017. Both observable and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long- dated volatilities) inputs (in thousands).

A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy as of March 31, 2017 and December 31, 2016 is as follows:

5. Property and Equipment

Property and equipment consist of the following at March 31, 2017 and December 31, 2016 (in thousands):

* Construction in progress includes both the land acquisition costs and the building costs.

Depreciation expense was approximately $56,000 and $13,000 for the three months ended March 31, 2017 and 2016.

6. Outstanding Debt

The following table summarizes outstanding debt as of March 31, 2017 and December 31, 2016, respectively (amount in thousands):

The following table summarizes total interest expenses related to senior convertible notes, other notes and mortgage loan for the three months ended March 31, 2017 and 2016, respectively (in thousands):

7. Net Loss per Share Applicable to Common Stockholders

Basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the reporting period. Diluted loss per common share is computed similar to basic loss per common share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock.

The following table sets forth the computation of loss per share for the three months ended March 31, 2017 and 2016, respectively:

The following securities were not included in the diluted net loss per share calculation because their effect was anti-dilutive as of the periods presented (in thousands): 

8. Related Party Transactions

Cognate BioServices, Inc.

Cognate Expenses and Accounts Payable

At March 31, 2017 and December 31, 2016, the Company owed Cognate $22.5 million and $23.4 million, respectively, for unpaid invoices for manufacturing and related services.

Overall, for the three months ended March 31, 2017 and 2016, the Company incurred research and development costs related to Cognate BioServices of $2.6 million and $11.2 million, respectively, relating to the DCVax-L and DCVax-Direct programs, product and process development work and preparations for upcoming Phase II trials. 

Cognate Organization

Pursuant to an institutional financing of Cognate in October 2016, Cognate’s operations outside the US were separated from its operations in the US. The operations outside the US include Cognate BioServices GmbH in Germany, Cognate BioServices Ltd. in the UK, and Cognate Israel in Israel. Both Cognate BioServices, Inc. in the US and the Cognate affiliates outside the US are owned by Toucan Fund III. The Cognate affiliate in Germany works with the Fraunhofer Institute to produce DCVax-L products there, and Cognate affiliates in the UK and Israel are preparing for production of DCVax-L products in those locations. Approximately $0.8 million of the total research and development cost related to Cognate entities outside the US are included in the overall amounts reported with respect to Cognate for the three months ended March 31, 2017.

Other Related Parties

Leslie J. Goldman - Demand Loans

During the quarter ended March 31, 2017, Leslie J. Goldman, an officer of the Company, loaned the Company $420,000 pursuant to two Demand Promissory Note Agreements (the “Goldman Notes”). The Goldman Notes bore interest at the rate of 12% per annum.

On March 27, 2017, the Company made an aggregate principal payment of $730,000 to settle all of Mr. Goldman’s outstanding demand notes and an aggregate of $47,000 interest payment associated with these demand notes.

Various Related Parties – Demand Loans

On April 19, 2017, the Company entered into a financing in an aggregate principal amount of $2,250,000 in the form of promissory notes with Toucan Capital Fund III, LP, an officer of the Company, Leslie Goldman, certain directors of the Company, Jerry Jasinowski, Robert Farmer and Cofer Black, and an unaffiliated investor. The notes bear interest at 10.0% per annum and are payable on demand with seven days’ advance notice by the applicable holder.

9. Stockholders’ Equity (Deficit)

Common Stock Issuances

First Quarter of 2017

On March 17, 2017, the Company entered into definitive agreements with institutional investors for a registered direct offering with gross proceeds of $7.5 million. The Company issued 18.8 million shares of common stock at a purchase price of $0.26 per share, or pre-funded warrants in lieu of shares.  Additionally, the investors received 5 year Class A warrants to purchase up to approximately 21.6 million shares of common stock with an exercise price of $0.26 per share, 3 month Class B warrants to purchase up to approximately 21.6 million shares of common stock with an exercise price of $1.00 per share, and 3 month Class C warrant to purchase up to approximately 10.0 million shares of common stock with an exercise price of $0.01 per share.  The full exercise price of these Class C warrants will also be $0.26 per share, with $0.25 per share pre-funded at the time of closing and another $0.01 per share payable upon exercise of each Class C Warrant. Total warrants issued in March 2017 have value of approximately $6.2 million.

During the quarter ended March 31, 2017, the Company issued an aggregate of 3,100,000 shares of common stock from the exercise of warrants that were issued in March 2017 for total proceeds of $31,000. All of these 3,100,000 shares of common stock were related to extinguishment of warrant liabilities. The fair value of the warrant liabilities was $713,000 on the date of exercise, which were recorded as a component of additional paid-in-capital, see Note 4 for more details regarding valuation.

On March 10, 2017, the Company issued 4,039,860 shares of common stock to the holders of the Company’s senior convertible note as additional consideration to extend the debt payment. The fair value of the common stock on the grant date was approximately $1.5 million.

On March 30, 2017, the Company issued 2,500,000 shares of common stock to the holder of the Company’s share-settled debt (the “Holder”) as advance payment for future debt conversion. The fair value of the share-settled debt will be reduced when the Company is notified by the Holder that such shares have been sold at market price. Such common shares were not sold by the Holder as of March 31, 2017. Therefore the Company didn’t reduce the share-settled debt balance upon issuance of such shares. 

Stock Purchase Warrants

The following is a summary of warrant activity for the three months ended March 31, 2017 (in thousands, except per share data):

The Company’s adoption of a sequencing policy in the fourth quarter of 2016 requires that all financial instruments issued subsequent to such adoption be treated as a derivative liability. As such, warrants issued in the current period report have been classified as liabilities.

10.   Variable Interest Entities

Variable Interest Entities (“VIEs”) are entities in which equity investors lack the characteristics of a controlling financial interest.  VIEs are consolidated by the primary beneficiary.  The primary beneficiary is the party who has both the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. 

After the assumption of $5.7 million in debt originally incurred by Cognate in October 2016 and if, in the future, the Company reverses $3.75 of Cognate invoices that were previously paid in common stock and warrants in October 2016, the Company has an implicit variable interest in Cognate to potentially fund Cognate’s losses (if Cognate incurs losses).  The Company determines whether it is the primary beneficiary of Cognate upon its initial involvement and the Company reassess whether it is the primary beneficiary of Cognate on an ongoing basis.  The determination of whether the Company is the primary beneficiary of Cognate is based upon the facts and circumstances and requires significant judgment.  The Company’s considerations in determining Cognate’s most significant activities and whether the Company has power to direct those activities include, but are not limited to, Cognate’s purpose and design and the risks passed through to investors, the voting interests of Cognate, management, service and/or other agreements of Cognate, involvement in Cognate’s initial design and the existence of explicit or implicit financial guarantees.  As of March 31, 2017, the Company does not have the power over the most significant activities (control of operating decisions) and therefore does not meet the "power" criteria of the primary beneficiary.

The maximum exposure to loss is limited to the notional amounts of the implicit variable interest in Cognate.  The Company has no current plans to provide any support additional to that which is noted above.  Therefore, the maximum exposure to loss from its implicit interest is limited to $4.5 million as of March 31, 2017; which is the shutdown fee the Company must pay to terminate their relationship with Cognate.

11. Commitments and Contingencies

Contingent Payment to Cognate BioServices

Under the January 17, 2014 DCVax®-L Manufacturing Services Agreement and the DCVax-Direct Agreement, a new set of provisions apply going forward to any shut down or suspension.  Under these provisions, the Company will be contingently obligated to pay certain fees to Cognate BioServices (in addition to any other remedies) if the Company shuts down or suspends its DCVax-L program or DCVax-Direct program.  For a shut down or suspension of the DCVax-L program, the fees will be as follows:

For a shut down or suspension of the DCVax-Direct program, the fees will be as follows:

While our DCVax programs are ongoing, the Company is required to pay certain fees for dedicated production suites or capacity reserved exclusively for DCVax production, and pay for a certain minimum number of patients, whether or not we fully utilize the dedicated capacity and number of patients.

Derivative and Class Action Litigation

On June 19, 2015, two purported shareholders filed a lawsuit in the Delaware Court of Chancery, captioned Tharp, et al. v. Cognate, et al., C.A. 11179-VCG (Del. Ch. filed June 19, 2015), purportedly suing on behalf of a class of similarly situated shareholders and derivatively on behalf of the Company. The lawsuit names Cognate BioServices, Inc., Toucan Partners, Toucan Capital Fund III, our CEO Linda Powers and the individuals who then served on the Company’s Board of Directors as defendants, and names the Company as a “nominal defendant” with respect to the derivative claims. The complaint generally challenges certain transactions between the Company and Cognate and the Toucan entities, in which Cognate and the Toucan entities provided services and financing to the Company, or agreed to the conversion of debts owed to them by the Company into equity. The complaint seeks unspecified monetary relief for the Company and the plaintiffs, and various forms of equitable relief, including disgorgement of allegedly improper benefits, rescission of the challenged transactions, and an order forbidding similar transactions in the future. The plaintiffs filed an amended complaint on November 6, 2015. The Company and the other named defendants filed motions to dismiss the amended complaint on January 19, 2016, which are now fully briefed. The Company intends to vigorously defend the case.

On November 19, 2015, a third purported shareholder filed a lawsuit in the U.S. District Court for the District of Maryland, captioned Yonemura v. Powers, et al., No. 15-03526 (D. Md. filed Nov. 19, 2015), claiming to sue derivatively on behalf of the Company. The complaint names the individuals who then served on the Company’s Board of Directors, Toucan Capital Fund III, L.P., Toucan General II, LLC, Toucan Partners, LLC, and Cognate as defendants, and names the Company as a nominal defendant. The complaint generally challenges the same transactions disputed in the Delaware case, claiming that the Company purportedly overcompensated Cognate and Toucan for certain services and loans in payments of stock, and that the Company’s CEO, Ms. Powers, benefited from these transactions with Cognate and Toucan, which she allegedly owns or controls. The complaint asserts that the alleged overpayments unjustly enriched Ms. Powers, Toucan, and Cognate; that the Company’s directors breached their fiduciary duties of loyalty and good faith to the Company by authorizing the payments to Cognate; and that Ms. Powers, Cognate, and Toucan aided and abetted the directors’ breaches of fiduciary duties. The plaintiff seeks an award of unspecified damages to the Company and seeks equitable remedies, including disgorgement by Ms. Powers, Toucan, and Cognate of the allegedly improper benefits received as a result of the disputed transactions. The plaintiff also seeks costs and disbursements associated with bringing suit, including attorneys' fees and expert fees. The Company intends to vigorously defend the case. The case is currently stayed pending the parties’ progress toward an acceptable resolution of the litigation.

On November 28, 2016, a purported shareholder filed a lawsuit in the Circuit Court for Montgomery County, Maryland, captioned Wells v. Powers, et al., Case No. 427353-V (Md. Cir. Ct., Mont. Cnty. filed Nov. 28, 2016), claiming to sue derivatively on behalf of the Company. The complaint names six current and former members of the Company’s Board of Directors, Toucan Partners, LLC, Toucan Capital Fund III, L.P., Toucan Partners, LP (a non-existent entity), Toucan General II, LLC, and Cognate as defendants, and names the Company as a nominal defendant. The complaint largely challenges the same transactions disputed in the two cases discussed above, claiming that the Company overcompensated Cognate and Toucan for certain services and loans. It asserts that, by authorizing those transactions, the individual defendants breached their fiduciary duties to the Company, abused their ability to control and influence the Company, and engaged in gross mismanagement of the Company’s business and assets. In addition, the complaint claims that the individual defendants are liable to the Company for misleading its investors and financiers. The complaint claims that the individual defendants were unjustly enriched by receiving compensation while the Company’s stock price was allegedly artificially inflated; that Ms. Powers, Toucan, and Cognate are “controlling” stockholders of the Company who breached their fiduciary duties to minority stockholders; that Ms. Powers, Toucan, and Cognate, benefited from these transactions due to their alleged “control” that the alleged overpayments unjustly enriched Ms. Powers, Toucan, and Cognate; and that Toucan and Cognate aided and abetted the individual defendants in breaching their fiduciary duties. The complaint seeks the award of unspecified damages to the Company; an order from the court directing the Company to reform its corporate governance and internal procedures; and equitable remedies, including restitution and disgorgement from defendants. The plaintiff also seeks the costs and disbursements associated with bringing suit, including attorneys’ fees, costs, and expenses. The plaintiff filed an amended complaint on March 1, 2017. The Company and the other named defendants filed motions to dismiss the amended complaint on April 17, 2017. The Company intends to vigorously defend the case.

Class Action Securities Litigation

On August 26, 2015, a purported shareholder of the Company filed a putative class action lawsuit in the U.S. District Court for the District of Maryland, captioned Lerner v. Northwest Biotherapeutics, Inc., et al., No. 15-02532 (D. Md. filed Aug. 26, 2015). The lawsuit named the Company and Ms. Powers as defendants. On December 14, 2015, the court appointed two lead plaintiffs. The Lead Plaintiffs filed an amended complaint on February 12, 2016, purportedly on behalf of all of those who purchased common stock in the Company between January 13, 2014 and August 21, 2015. The amended complaint generally claimed that the defendants violated Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 by making misleading statements and/or omissions on a variety of subjects, including the status and results of the Company’s DCVax trials. The amended complaint sought unspecified damages, attorneys’ fees, and costs. The Company and Ms. Powers filed a motion to dismiss the amended complaint. On March 21, 2017, the court entered an order dismissing the case, and on April 12, 2017, the Lead Plaintiffs submitted a letter advising the court that they do not intend to file an amended complaint.

Shareholder Books and Record Demand

On December 7, 2015, the Company received a letter on behalf of shareholders demanding to inspect certain corporate books and records pursuant to Section 220 of the Delaware General Corporation Law. The demand letter claimed that its purpose was to investigate: (1) allegedly improper transactions, misconduct, and mismanagement by directors and an officer of the Company; (2) the possible breach of fiduciary duty by certain directors and officers of the Company; and (3) the independence and disinterestedness of the Company’s board, to determine whether a pre-suit demand would be necessary before commencing any derivative action on behalf of the Company.

U.S. Securities and Exchange Commission

As previously reported, the Company received a formal information request (subpoena) from the SEC on December 13, 2017, and follow-on formal information requests thereafter, regarding several broad topics that have been previously disclosed, including the Company’s membership on Nasdaq and delisting, related party matters, internal controls and the Company’s Special Litigation Committee. The period covered is January 1, 2013 to the present. The investigation is ongoing and the Company is cooperating fully.

Special Litigation Committee

As previously reported, the Company appointed a Special Litigation Committee, and Committee has undertaken an inquiry into the allegations of various lawsuits filed against the Company, and an anonymous internet report raising a number of criticisms of the Company and its Board and management, including with respect to the reasonableness of the transactions with Cognate. The Committee has retained experts to analyze some of these issues.

12. Subsequent Events

On April 14, 2017, the Company entered into Stock Purchase Agreement with multiple investors. The Company issued 1,384,615 shares of common stock at a price of $0.26 per share. The Company also offered Class A Common Stock Purchase Warrants to purchase up to 1,038,461 shares of Common Stock at an exercise price of $0.26 per share (the “Class A Warrants”) and Class B Common Stock Purchase Warrants to purchase up to 1,038,461 shares of Common Stock at an exercise price of $1.00 per share (the “Class B Warrants”). Both the Class A Warrants and the Class B Warrants are exercisable immediately. The Class A Warrants are exercisable for five years and the Class B Warrants are exercisable for three months. The Company received gross proceeds of $360,000 from this offering.

On April 19, 2017, the Company entered into a financing in an aggregate principal amount of $2,250,000 in the form of promissory notes with Toucan Capital Fund III, LP, an officer of the Company, Leslie Goldman, certain directors of the Company, Jerry Jasinowski, Robert Farmer and Cofer Black, and an unaffiliated investor. The notes bear interest at 10.0% per annum and are payable on demand with seven days’ advance notice by the applicable holder.

On May 5, 2017, the Company entered into a loan agreement (the “Note”) with an individual investor (the “Holder”) for an aggregate principal amount of $1,000,000. The Note bore interest at 10% per annum and will be due by June 30, 2017.

During April 2017 and May 2017, certain existing Class C warrants holders exercised an aggregate amount of 4,900,000 warrants at an exercise price of $0.01 for cash.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those statements included with this report. In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. The words “believe,” “expect,” “intend,” “anticipate,” and similar expressions are used to identify forward-looking statements, but some forward-looking statements are expressed differently. Many factors could affect our actual results, including those factors described under “Risk Factors” in our Form 10-K for the year ended December 31, 2016 and in Part II Item 1A of this report. These factors, among others, could cause results to differ materially from those presently anticipated by us. You should not place undue reliance on these forward-looking statements.

Overview

The Company is focused on developing personalized immune therapies for cancer. We have developed a platform technology, DCVax, which uses activated dendritic cells to mobilize a patient's own immune system to attack their cancer.

The Company’s lead product, DCVax®-L, is designed to treat solid tumor cancers in which the tumor can be surgically removed. This product in an ongoing Phase III trial for newly diagnosed Glioblastome multiforme (GBM). 331 patients have been enrolled in the trial, and enrollment is closed. The Company is also working on preparations for Phase II trials of DCVax-L for other indications.

The Company’s second product, DCVax®-Direct, is designed to treat inoperable solid tumors. A 40-patient Phase I trial has been completed, and included treatment of a diverse range of cancers. The Company is working on preparations for Phase II trials of DCVax-Direct.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses.

On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation. We based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not readily apparent from other sources. Actual results may differ from these estimates.

Our critical accounting policies and significant estimates are detailed in our Annual Report on Form 10-K for the year ended December 31, 2016. Our critical accounting policies and significant estimates have not changed substantially from those previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

Results of Operations

Operating costs:

Operating costs and expenses consist primarily of research and development expenses, including clinical trial expenses which increase when we are actively participating in clinical trials and especially when we are in a large ongoing international phase III trial. The associated administrative expenses also increase as such operating activities grow.

In addition to clinical trial related costs, our operating costs may include ongoing work relating to our DCVax products, including R&D, product characterization, and related matters. Going forward, we will also have to undertake process validation work.

Our operating costs also include the costs of preparations for the launch of new or expanded clinical trial programs, such as our planned Phase II clinical trials. The preparation costs include payments to regulatory consultants, lawyers, statisticians, sites and others, evaluation of potential investigators, the clinical trial sites and the CROs managing the trials and other service providers, and expenses related to institutional approvals, clinical trial agreements (business contracts with sites), training of medical and other site personnel, trial supplies and other. Additional substantial costs relate to the maintenance of manufacturing capacity, in both the US and Europe.

Our operating costs also include significant legal and accounting costs in operating the Company.

Research and development:

Discovery and preclinical research and development expenses include costs for substantial external scientific personnel, technical and regulatory advisers, and others, costs of laboratory supplies used in our internal research and development projects, travel, regulatory compliance, and expenditures for preclinical and clinical trial operation and management when we are actively engaged in clinical trials.

Because we are pre-revenue company, we do not allocate research and development costs on a project basis. We adopted this policy, in part, due to the unreasonable cost burden associated with accounting at such a level of detail and our limited number of financial and personnel resources.

General and administrative:

General and administrative expenses include administrative personnel related salary and benefit expenses, cost of facilities, insurance, travel, legal fees and expenses, property and equipment and amortization of stock options and warrants.

Three Months Ended March 31, 2017 and 2016

For the three months ended March 31, 2017 and 2016, we recognized a net loss of $12.6 million and a net loss of $6.1 million, respectively. Net cash used in operations was $12.3 million and $17.6 million for the three months ended March 31, 2017 and 2016, respectively. The cash expenditures in the three months ended March 31, 2017 included substantial payments for expenses previously incurred in connection with the Phase III clinical trial of DCVax-L.

Research and Development Expense

Research and development expense was $5.0 million for the three months ended March 31, 2017 versus $13.4 million for the three months ended March 31, 2016. The decrease was primarily due to a decrease of approximately $3.6 million of non-cash manufacturing and services costs to Cognate.

For the three months ended March 31, 2017 and 2016, we made cash payments for the two periods, respectively, of approximately $3.2 million, and $5.2 million to Cognate. At March 31, 2017 and 2016, we owed Cognate $22.5 million and $6.4 million, respectively, for unpaid invoices for DCVax-L and DCVax-Direct programs, product and process development work and preparations for upcoming Phase II trials.

General and Administrative Expense

General and administrative expense was $6.9 million (cash and non-cash expenses combined) for the three months ended March 31, 2017 versus $4.3 million for the three months ended March 31, 2016. The increase was due to a substantial increase in legal fees and expenses. We incurred legal expenses of $3.9 million and $0.9 million for the three months ended March 31, 2017 and March 31, 2016, respectively.

Change in fair value of derivatives

During the three months ended March 31, 2017 and March 31, 2016 we recognized a non-cash gain of $1.4 million and $13.5 million, respectively. The significant reduction relates to the change in the fair value of the derivative liability which was due to all Cognate derivative liabilities that were extinguished pursuant to the Remediation Plan in August 2016.

Interest Expense

Interest expense (including non-cash elements such as amortization of debt discount and debt issuance cost) was $1.2 million and $0.7 million for the three months ended March 31, 2017 and March 31, 2016, respectively. The change is due to the increase in outstanding debt balance as of March 31, 2017 versus March 31, 2016.

Liquidity and Capital Resources

We have experienced recurring losses from operations. During the three months ended March 31, 2017 and March 31, 2016, net cash outflows from operations were $12.3 million and $17.6 million, respectively. The net cash outflows during the three months ended March 31, 2017 included substantial payments for expenses previously incurred in connection with the Phase III clinical trial of DCVax-L.

At March 31, 2017, current assets totaled $3.2 million, compared to $7.9 million at December 31, 2016. Current assets less current liabilities produces working capital deficit (cash and non-cash liabilities combined) in the amount of $78.8 million at March 31, 2017 (with $8.9 million of the $78.8 million deficit comprised of non-cash derivative liabilities and $6.2 million comprised of an estimated liability for future environmental costs), compared to a deficit of $68.5 million at December 31, 2016, as described above.

Contingent Contractual Payment

The following table summarizes our contractual obligations as of March 31, 2017 (amount in thousands):

On March 3, 2017, we entered into a note purchase agreement (the “Note”) with an individual investor for an aggregate principal amount of $1,155,000. The Note bore interest at 8% per annum with a 6 month term. The Note carries an original issue discount of $150,000 and $5,000 legal cost that was reimbursable to the investor.

For a shut down or suspension of the DCVax-Direct program, the fees will be as follows:

While our DCVax programs are ongoing, we are required to pay certain fees for dedicated production suites or capacity reserved exclusively for DCVax production, and pay for a certain minimum number of patients, whether or not we fully utilize the dedicated capacity and number of patients.

Operating Activities

During the three months ended March 31, 2017 and March 31, 2016, net cash outflows from operations were $12.3 million and $17.6 million, respectively.

Investing Activities

During the three months ended March 31, 2017, we received $218,000 cash refund from certain vendors regarding UK facility leasehold improvement.

During the three months end March 31, 2016, we used $2.7 million to capitalize costs related to the UK facility.

Financing Activities

We received approximately $6.7 million and $9.2 million cash proceeds from issuance of common stock and warrants in the registered direct offering during the three months ended March 31, 2017 and 2016, respectively.

We received approximately $3.0 million cash proceeds from issuance of multiple debt to third parties and related party during the three months ended March 31, 2017.

We made an aggregate debt payment of $1.7 million, including $0.7 million payment to related party during the three months ended March 31, 2017.

Our financial statements indicate there is substantial doubt about our ability to continue as a going concern as we are dependent on our ability to obtain ongoing financing and ultimately to generate sufficient cash flow to meet our obligations on a timely basis.  We can give no assurance that our plans and efforts to achieve the above steps will be successful.

Other factors affecting our ongoing funding requirements include the number of staff we employ, the number of sites and number of patients still undergoing treatment in our Phase III brain cancer trial, the costs of further product and process development work relating to our DCVax products, the costs of preparations for multiple Phase II trials, the costs of expansion of manufacturing, the cost of pursuing our Hospital Exemption program and potential reimbursements in Germany, and unanticipated developments. The extent of resources available to us will determine which programs can move forward and at what pace.

Off-Balance Sheet Arrangements

Since our inception, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may result from the change in value of financial instruments due to fluctuations in its market price. Market risk is inherent in all financial instruments. Market risk may be exacerbated in times of trading illiquidity when market participants refrain from transacting in normal quantities and/or at normal bid-offer spreads. Our exposure to market risk is directly related to derivatives, debt and equity linked instruments related to our financing activities.

Our assets and liabilities are overwhelmingly denominated in U.S. dollars. We do not use foreign currency contracts or other derivative instruments to manage changes in currency rates. We do not now, nor do we plan to, use derivative financial instruments for speculative or trading purposes. However, these circumstances might change.

The primary quantifiable market risk associated with our financial instruments is sensitivity to changes in interest rates. Interest rate risk represents the potential loss from adverse changes in market interest rates. We use an interest rate sensitivity simulation to assess our interest rate risk exposure. For purposes of presenting the possible earnings effect of a hypothetical, adverse change in interest rates over the 12-month period from our reporting date, we assume that all interest rate sensitive financial instruments will be impacted by a hypothetical, immediate 100 basis point increase in interest rates as of the beginning of the period. The sensitivity is based upon the hypothetical assumption that all relevant types of interest rates that affect our results would increase instantaneously, simultaneously and to the same degree. We do not believe that our cash and equivalents have significant risk of default or illiquidity.

The sensitivity analyses of the interest rate sensitive financial instruments are hypothetical and should be used with caution. Changes in fair value based on a 1% or 2% variation in an estimate generally cannot be extrapolated because the relationship of the change in the estimate to the change in fair value may not be linear. Also, the effect of a variation in a particular estimate on the fair value of financial instruments is calculated independent of changes in any other estimate; in practice, changes in one factor may result in changes in another factor, which might magnify or counteract the sensitivities. In addition, the sensitivity analyses do not consider any action that we may take to mitigate the impact of any adverse changes in the key estimates.

Based on our analysis, as of March 31, 2017, the effect of a 100+/- basis point change in interest rates on the value of our financial instruments and the resultant effect on our net loss are considered immaterial.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Certain of our Company’s finance and accounting functions are performed by an external firm on a contract services basis. This firm specializes in providing finance and accounting functions for biotech companies, and the founders and senior managers are highly experienced former partners of national accounting firms. Further, the Company is engaged with a second external firm: one that specializes in Sarbanes-Oxley matters and helping public companies improve their disclosure controls and procedures. Together with these two external firms, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on the evaluation of our disclosure controls and procedures, our principal executive, financial and accounting officer concluded that during the period covered by this report, our Company’s processes for internally reporting material information in a systematic manner to allow for timely filing of material information were not effective, due to inherent limitations from being a small company, and the three material weaknesses described in our December 31, 2016 Form 10-K remain as of the filing of this form 10-Q.  We continue to implement the enhanced procedures and controls developed during 2016, and we continue to work together with the two external firms to further strengthen our disclosure controls and procedures, and further mitigate the remaining weaknesses.

Changes in Internal Control over Financial Reporting

We continue to make further improvements to our internal controls over financial reporting, in addition to the improvements developed in 2016. During the quarter ended March 31, 2017, we implemented enhanced procedures to identify and disclose related party transactions.  These enhanced procedures did not result in identifying any related party transactions other than the ones already known and disclosed. We will continue to take steps to improve our internal control system and to address the remaining deficiencies, but the timing of such steps is uncertain and our ability to retain or attract qualified individuals to undertake these functions is also uncertain.  Other than the enhanced procedures to identify and disclose related party transactions, there were no changes in our internal control over financial reporting in the quarter ended March 31, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II - Other Information

Item 1. Legal Proceedings

Derivative and Class Action Litigation

On June 19, 2015, two purported shareholders filed a lawsuit in the Delaware Court of Chancery, captioned Tharp, et al. v. Cognate, et al., C.A. 11179-VCG (Del. Ch. filed June 19, 2015), purportedly suing on behalf of a class of similarly situated shareholders and derivatively on behalf of the Company. The lawsuit names Cognate BioServices, Inc., Toucan Partners, Toucan Capital Fund III, our CEO Linda Powers and the individuals who then served on the Company’s Board of Directors as defendants, and names the Company as a “nominal defendant” with respect to the derivative claims. The complaint generally challenges certain transactions between the Company and Cognate and the Toucan entities, in which Cognate and the Toucan entities provided services and financing to the Company, or agreed to the conversion of debts owed to them by the Company into equity. The complaint seeks unspecified monetary relief for the Company and the plaintiffs, and various forms of equitable relief, including disgorgement of allegedly improper benefits, rescission of the challenged transactions, and an order forbidding similar transactions in the future. The plaintiffs filed an amended complaint on November 6, 2015. The Company and the other named defendants filed motions to dismiss the amended complaint on January 19, 2016, which are now fully briefed. The Company intends to vigorously defend the case.

On November 19, 2015, a third purported shareholder filed a lawsuit in the U.S. District Court for the District of Maryland, captioned Yonemura v. Powers, et al., No. 15-03526 (D. Md. filed Nov. 19, 2015), claiming to sue derivatively on behalf of the Company. The complaint names the individuals who then served on the Company’s Board of Directors, Toucan Capital Fund III, L.P., Toucan General II, LLC, Toucan Partners, LLC, and Cognate as defendants, and names the Company as a nominal defendant. The complaint generally challenges the same transactions disputed in the Delaware case, claiming that the Company purportedly overcompensated Cognate and Toucan for certain services and loans in payments of stock, and that the Company’s CEO, Ms. Powers, benefited from these transactions with Cognate and Toucan, which she allegedly owns or controls. The complaint asserts that the alleged overpayments unjustly enriched Ms. Powers, Toucan, and Cognate; that the Company’s directors breached their fiduciary duties of loyalty and good faith to the Company by authorizing the payments to Cognate; and that Ms. Powers, Cognate, and Toucan aided and abetted the directors’ breaches of fiduciary duties. The plaintiff seeks an award of unspecified damages to the Company and seeks equitable remedies, including disgorgement by Ms. Powers, Toucan, and Cognate of the allegedly improper benefits received as a result of the disputed transactions. The plaintiff also seeks costs and disbursements associated with bringing suit, including attorneys' fees and expert fees. The Company intends to vigorously defend the case. The case is currently stayed pending the parties’ progress toward an acceptable resolution of the litigation.

On November 28, 2016, a purported shareholder filed a lawsuit in the Circuit Court for Montgomery County, Maryland, captioned Wells v. Powers, et al., Case No. 427353-V (Md. Cir. Ct., Mont. Cnty. filed Nov. 28, 2016), claiming to sue derivatively on behalf of the Company. The complaint names six current and former members of the Company’s Board of Directors, Toucan Partners, LLC, Toucan Capital Fund III, L.P., Toucan Partners, LP (a non-existent entity), Toucan General II, LLC, and Cognate as defendants, and names the Company as a nominal defendant. The complaint largely challenges the same transactions disputed in the two cases discussed above, claiming that the Company overcompensated Cognate and Toucan for certain services and loans. It asserts that, by authorizing those transactions, the individual defendants breached their fiduciary duties to the Company, abused their ability to control and influence the Company, and engaged in gross mismanagement of the Company’s business and assets. In addition, the complaint claims that the individual defendants are liable to the Company for misleading its investors and financiers. The complaint claims that the individual defendants were unjustly enriched by receiving compensation while the Company’s stock price was allegedly artificially inflated; that Ms. Powers, Toucan, and Cognate are “controlling” stockholders of the Company who breached their fiduciary duties to minority stockholders; that Ms. Powers, Toucan, and Cognate, benefited from these transactions due to their alleged “control” that the alleged overpayments unjustly enriched Ms. Powers, Toucan, and Cognate; and that Toucan and Cognate aided and abetted the individual defendants in breaching their fiduciary duties. The complaint seeks the award of unspecified damages to the Company; an order from the court directing the Company to reform its corporate governance and internal procedures; and equitable remedies, including restitution and disgorgement from defendants. The plaintiff also seeks the costs and disbursements associated with bringing suit, including attorneys’ fees, costs, and expenses. The plaintiff filed an amended complaint on March 1, 2017. The Company and the other named defendants filed motions to dismiss the amended complaint on April 17, 2017. The Company intends to vigorously defend the case.

Class Action Securities Litigation

On August 26, 2015, a purported shareholder of the Company filed a putative class action lawsuit in the U.S. District Court for the District of Maryland, captioned Lerner v. Northwest Biotherapeutics, Inc., et al., No. 15-02532 (D. Md. filed Aug. 26, 2015). The lawsuit named the Company and Ms. Powers as defendants. On December 14, 2015, the court appointed two lead plaintiffs. The Lead Plaintiffs filed an amended complaint on February 12, 2016, purportedly on behalf of all of those who purchased common stock in the Company between January 13, 2014 and August 21, 2015. The amended complaint generally claimed that the defendants violated Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 by making misleading statements and/or omissions on a variety of subjects, including the status and results of the Company’s DCVax trials. The amended complaint sought unspecified damages, attorneys’ fees, and costs. The Company and Ms. Powers filed a motion to dismiss the amended complaint. On March 21, 2017, the court entered an order dismissing the case, and on April 12, 2017, the Lead Plaintiffs submitted a letter advising the court that they do not intend to file an amended complaint.

Shareholder Books and Record Demand

On December 7, 2015, the Company received a letter on behalf of shareholders demanding to inspect certain corporate books and records pursuant to Section 220 of the Delaware General Corporation Law. The demand letter claimed that its purpose was to investigate: (1) allegedly improper transactions, misconduct, and mismanagement by directors and an officer of the Company; (2) the possible breach of fiduciary duty by certain directors and officers of the Company; and (3) the independence and disinterestedness of the Company’s board, to determine whether a pre-suit demand would be necessary before commencing any derivative action on behalf of the Company.

U.S. Securities and Exchange Commission

As previously reported, the Company received a formal information request (subpoena) from the SEC on December 13, 2016, and follow-on formal information requests thereafter, regarding several broad topics that have been previously disclosed, including the Company’s membership on Nasdaq and delisting, related party matters, internal controls and the Company’s Special Litigation Committee. The period covered is January 1, 2013 to the present. The investigation is ongoing and the Company is cooperating fully.

Special Litigation Committee

As previously reported, the Company appointed a Special Litigation Committee, and Committee has undertaken an inquiry into the allegations of various lawsuits filed against the Company, and an anonymous internet report raising a number of criticisms of the Company and its Board and management, including with respect to the reasonableness of the transactions with Cognate. The Committee has retained experts to analyze some of these issues.

Item 1A. Risk Factors

See risk factors described in our most recent Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.